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Proposed bank tax targets revenge, not reform, economist says

Charles Kahn, an economist and the head of the U. of I. finance department, says the Obama administration's tax plan is flawed as a long-term safeguard against risk-taking by banks that fueled the nation's deepest economic crisis since the Great Depression.

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CHAMPAIGN, Ill. - A proposed $90 billion tax on the nation's largest banks is more about revenge than regulation, a University of Illinois banking expert says.

Charles Kahn, an economist and the head of the U. of I. finance department, says the Obama administration's tax plan is flawed as a long-term safeguard against risk-taking by banks that fueled the nation's deepest economic crisis since the Great Depression.

But he says the call for a temporary, 10-year tax is "astute politics" that would feed the public's thirst to punish Wall Street without imposing a permanent levy that could ultimately damage the financial system.

"Perhaps the political logic is this: If we make the fat cats howl loud enough, then public opinion will be assuaged," Kahn said. "The pound of flesh will have been extracted and financial institutions can return to normal, without subjecting the system to a new, overarching tax structure."

"In other words, it's a balancing act," he said. "How do you stage the maximum of perceived revenge with the minimum of damage to the financial system itself?"

A tax is appealing to outraged Americans who want to punish banks for their role in the economic meltdown, the taxpayer-supported bailouts that followed and the hefty pay handed to bank executives as other workers struggled to make ends meet, he said.

"All of these explanations will be satisfying to voters," Kahn said. "But in reality they will be poor justifications of any permanent program."

A tax that seeks to reimburse taxpayers is pointless, he says, because banks that received bailout money will likely reimburse the government for direct costs anyway and any indirect costs are impossible to link to one institution over another.

Kahn also says imposing a tax to limit executive compensation could be counterproductive in a financial industry that operates globally. While banks would likely absorb the taxes in the short run, businesses could move off shore in the long run.

He questions the effectiveness of collectively punishing the financial industry after the fact. He also worries that the move could set a dangerous precedent if approved by Congress, leading to future taxes for behavior that merely runs afoul of lawmakers rather than being clearly bad for the economy.

"This tax cannot successfully discriminate between institutions that caused the crisis and institutions that ameliorated the crisis," Kahn said. "Indeed, on the same grounds, you might as well tax members of Congress for their role in the crisis."

He says regulators around the world are examining taxes and fees to discourage risk-taking that could net another financial meltdown, but face a host of serious concerns.

If taxes are imposed unevenly across countries, institutions will merely move, Kahn said. A tax imposed based on businesses' labels - such as banks, intermediaries or hedge funds - will simply lead those institutions to change their labels.

"Given the difficulties, it's reasonable to ask whether regulators should be trying so hard to adjust financial institutions' incentives in these ways, or whether they should instead focus on how to make crises less damaging when they do arise," he said.